Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) of LMI Parent, L.P. and its subsidiary, GoTo Group, Inc. (GoTo Group, fka LogMeIn, Inc.) to 'RD' (Restricted Default) from 'CCC+'.
This action follows the company's execution of a tender offer for nearly $2.3 billion of its $3.4 billion of debt (including the undrawn $250 million revolver) prior to the transaction. GoTo Group has made a tender offer for the remaining $882 million of first-lien debt.
Fitch views the executed tender offer as a distressed debt exchange (DDE) because it was executed well below par and maturities were extended. Fitch also views the pending tender offer as a DDE as it is also offered well below par as well and extends maturities. Fitch believes GoTo Group has taken these actions to avoid an eventual probable default.
Subsequently, Fitch has reassessed and upgraded the IDRs to 'CCC-' and placed them on Rating Watch Negative (RWN), reflecting that the pending tender offer heightens the probability of a rating downgrade, which Fitch would view as a DDE. Fitch has assigned the new first-lien first out revolver, term loans and notes ratings of 'B-'/'RR1' and the new first-lien second out term loan and notes ratings of 'CCC'/'RR3'. Fitch has placed the first-lien second out term loan and notes on RWN given the likelihood of a two-notch downgrade if the second DDE is executed. Fitch has downgraded the previously existing first-lien term loan and notes to 'C'/'RR6' from 'B-'/'RR3' on RWN. Fitch expects to resolve the RWN on the IDRs around the time of the consent deadlines.
Fitch has withdrawn the 'B-'/'RR3' rating for the previously existing first-lien revolver since the revolver has been extinguished.
Key Rating Drivers
First DDE Executed: Fitch regards GoTo Group's executed debt exchange for a large portion of the first-lien term loan and notes as a DDE. The tender offer was executed well below par, and it extends the maturities of its term loans and notes by eight months and the revolver by 2.5 years. This was the first step the company has taken to resize its financial liabilities.
The new debt is structured in two secured tranches: first-lien first out debt and first-lien second out debt. The new first-lien first out revolver benefits GoTo Group's liquidity position; the prior revolver was due August 2025 and contained a financial covenant that restricted the company's availability to draw upon it. The new revolver's financial covenant provides headroom, and the maturity date extends until April 2028.
Second DDE Offer Extended: GoTo Group's second step to reduce its financial liabilities is the pending tender offer to exchange the $882 million of previously existing first-lien debt for new first-lien debt, which will be comprised of both the first-lien first out and first-lien second out. If the proposed transaction is executed, Fitch projects that the rating recovery prospects for the first-lien second out debt will fall to 'RR5' from 'RR3', prompting the rating to fall to 'CC' from 'CCC'.
The combination of the two DDE's would reduce the company's debt by a total of $392 million after accounting for $100 million of the issuance of a first-lien first out 'new money' term loan. In addition, the interest rates on the new debt are unchanged from the previously issued debt. Therefore, the interest expense burden will continue to erode FCF, although not to the same extent.
Further Rating Actions to Follow: Fitch expects to lower the IDRs to 'C' once lenders agree upon the DDE and set a date for the debt exchange. Once the DDE is executed, Fitch would lower the IDRs to 'RD' and reassess the rating based on the final capital structure.
Improved Liquidity and Negative FCF: The new $250 million revolver will benefit the company's liquidity position in the near term along with the $136 million of cash on the balance sheet as of the end of 3Q23, down from $170 million at the end of 2022 and $316 million at the end of 2021 (which benefited from a $198 million divestiture). The company's negative FCF has been a key driver of lower liquidity.
GoTo Group's FCF in 2022 was negative $55 million and for the first nine months of 2023 was negative $17 million. Fitch forecasts negative FCF for 2023 and continuing into 2024. Fitch believes that the company's ability to reverse the trend in 2025 is dependent on its ability to have stable or growing revenues and EBITDA, which may prove challenging. Fitch could take additional negative rating action if negative FCF persists or accelerates.
Continued Revenue Declines: The company's product offerings include innovative offerings and some legacy offerings that have experienced declining revenues. The company's Core Collaboration segment offers GoToMeetings (web conferencing) and other GoTo Group's solutions that have lost SMB customers and revenues to competitors. Fitch expects revenues for this segment to be down significantly in 2023. This segment did well in the early days of the pandemic, but that favorable impact began modestly winding down in late 2021, and the pace of the decline has since accelerated.
Revenues for the company's Remote Support Group has also declined but not to the extent of Core Collaboration. Both UCaaS and LastPass have grown as has, to a lesser extent, Remote Support, but those revenue improvements have not been enough to offset declines in Core Collaboration.
Highly Competitive Market: GoTo Group operates in a crowded competitive environment with large and small players that all compete for the same SMB customers. As competition has increased, GoTo Group's overall revenues have declined modestly, largely due to lower results in its Collaboration for web conferencing. Fitch expects GoTo Group to continue facing intense competition across each of its core end markets, including from market leaders who are larger and have greater financial flexibility.
While GoTo Group's strategy is focused on providing a comprehensive product platform to the SMB segment, it competes with other SMB focused competitors like 8x8; enterprise focused competitors like RingCentral and Vonage; enterprise solution companies with sizeable installed bases like Microsoft, which offers Teams; and Cisco, which offers Webex. Zoom is another significant competitor that serves all end markets from SMBs to large enterprise customers.
Highly Recurring and Diversified Revenues: The majority of GoTo Group's revenues are subscription based. Additionally, it has a number of contracts that are annual or multi-year contracts, and many of those contracts are paid for upfront. Consistent with the fragmented nature of the SMB segment it serves, the company has over 2.5 million paying customers with no customer accounting for more than 0.5% of revenues.
Diversified Product Mix: GoTo Group has a variety of product offerings. For the first nine months of 2023, UCaaS (which is largely GoTo Connect) accounted for 34% of revenues and Core Collaboration for 15%. These two segments make up GoTo Group's Unified Core Collaboration (UCC) offerings. In addition, Remote Support accounted for 32% for the quarter's revenues and LastPass for 19%. The LastPass segment has been moved into its own silo, and GoTo Group has been working to create this as a standalone entity since December 2021.
Derivation Summary
GoTo Group's rating of 'CCC-' reflects the heightened probability of a downgrade given the pending DDE.
Assuming the DDE is executed, the company would still have limited liquidity, high leverage and negative FCF. The company benefits from strong recurring revenues and EBITDA margins in the low 30's. The ratings also reflect Fitch's expectation that despite strong secular demand for UCaaS and network security, GoTo Group's revenues are expected to be negatively affected by the highly competitive landscape that the Core Collaboration segment faces.
The company's leverage was 7.6x for the LTM ended 3Q23, and Fitch expects it to remain in the range of 7.0x to 8.0x over the rating horizon. GoTo Group has less financial flexibility than other peers in the software sector. Like other private equity owned issuers, Fitch believes that the company's focus is ultimately on ROE rather than debt reduction.
Fitch rates the IDRs of the LMI Parent, L.P, and its wholly-owned subsidiary, GoTo Group, Inc. on a consolidated basis, using the weak parent/strong subsidiary approach and open access and control factors, based on the entities operating as a single enterprise with strong legal and operational ties.
Key Assumptions
Fitch assumes revenues decline in the low to mid-single digits in 2023 through 2025 before stabilizing. It is assumed that the decline from Core Collaboration cannot offset the modest growth in GoTo Group's other segments;
EBITDA margins remain in the low to mid 30's over the rating horizon;
Capex remains low and in the range of 3.5% to 4.0% over the rating horizon;
Fitch assumes FCF is negative in 2023 and in 2024, FCF is modestly positive due to lower floating interest rates;
Debt repayments are limited to mandatory amortization payments;
No assumptions are made for dividends or acquisitions.
Recovery Analysis
RECOVERY ANALYSIS ASSUMPTIONS
The recovery analysis assumes that GoTo Group would be reorganized as a going-concern entity in bankruptcy rather than liquidated. A 10% administrative claim is assumed. The recovery analysis also assumes pressure in the form of sustained customer churn at the Core Collaboration segment, which is assumed to continue to lose SMB customers to the competition such as Zoom, Microsoft Teams, Webex, 8x8, and RingCentral. As a result, Fitch assumes this causes adjusted EBITDA to decline to $340 million, lower than our prior assumption of $380 million reflecting expectations of lower revenues and EBITDA. Fitch applies a 6.0x multiple, to arrive at a going concern enterprise value (EV) just over $2.0 billion.
TEV/EBITDA Multiple Rationale: An EV Multiple of 6.0x EBITDA is applied to the GC EBITDA to calculate a post-reorganization enterprise value. The choice of this multiple considered the following factors:
Fitch's Bankruptcy Enterprise Values and Creditor Recoveries showed that bankruptcy case study exit multiples for technology peer companies ranged from 2.6x-10.8x.
Of these companies, only five were in the Software sector: Allen Systems Group, Inc. (8.4x), Avaya Inc. (2017: 8.1x and 2023: 7.5x); Aspect Software Parent, Inc. (5.5x), Sungard Availability Services Capital, Inc. (4.6x) and Riverbed Technology Software (8.3x).
As a result, Fitch rates the first lien first out debt at 'B-'/'RR1', the first-lien second out debt at 'CCC'/'RR3' and the previously existing first-lien debt at 'C'/'RR6'.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Positive rating action is unlikely until after the successful execution of the second DDE.
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Fitch expects to lower the IDRs to 'C' once lenders agree upon the DDE and set a date for the debt exchange.
Liquidity and Debt Structure
Improved Liquidity: As of Sept. 30, 2023, GoTo Group had cash on the balance sheet of $136 million. The company's near-term liquidity has improved with a new $250 million revolver due 2028. Fitch expects the company to generate negative FCF in the near term, which would reduce GoTo Group's liquidity position.
With the executed first DDE, the debt structure has changed and now includes first-lien first out debt, first-lien second out debt and subordinated to those instruments, the previously existing first-lien debt which has an outstanding tender offer.
Issuer Profile
LMI Parent, L.P. is the parent of its wholly-owned subsidiary, GoTo Group, Inc. (GoTo Group, fka LogMeIn Inc.). GoTo Group focuses on unified communication and collaboration (through Unified Communication as a Service [UCaaS] and its collaboration solutions), identity access management, and remote support for the SMB market.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
LMI Parent, L.P. has an ESG Relevance Score of '4' for Management Strategy due to its exposure to strategic risk, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
RINGCENTRAL, INC. 
